Sunday, February 8, 2009

A critique of protectionism in the stimulus

I kept my critique of protectionism for a separate post.

I'll refer you to my prior post, in which I stated that I generally like the stimulus the Democrats have put together, especially after the Republicans forced them to streamline it. It's not even close to perfect, but it does get a lot of good things done. However, this particular provision is plain stupid, and shows once again that our president is not an economist.

The Buy American Iron and Steel provision in the stimulus states that construction projects in the stimulus need to buy American-sourced steel and iron if it's not "prohibitive" to do so. Here's an example of why that's a bad idea.

Let's keep things simple and pretend the entire stimulus were made of bridges. It takes 1 pound of steel to build a bridge. You have 10 bucks to spend on steel. Overall, internationally available steel goes for $1 per pound at any quantities you're going to be buying. However, American steel goes for $1 for the first 4 pounds, and then rises to $2 because you've hit available capacity.

Additionally, let's say it takes one person to build a bridge, and one person to make a dollar's worth of steel.

With no Buy American provision:
You have 10 dollars. You buy 10 pounds of steel and make 10 bridges. You employ 14 Americans (10 for the bridges and 4 for the steel) and 6 foreigners (6 for the steel). Benefit to America: 14 jobs and 10 bridges.

With Buy American provision:
You have 10 dollars. You buy 7 pounds of steel (4 for $1 and 3 for $2) and make 7 bridges. You employ 14 Americans (7 for the bridges and 7 for the steel). Benefit: 14 jobs and 7 bridges.

Therefore, the desire to "keep more jobs in America" does in fact keep a greater PERCENTAGE of jobs in the process in America (70% of all the jobs vs 100% of all the jobs)... but ultimately, America walks away with the same number of jobs and fewer bridges because our overall productivity goes down due to cost increases.

Obviously, my numbers are entirely arbitrary, but the structural framework holds. A recent study that looked at actual numbers found that every $1 outsourced outside of the United States returned $1.12 to the US economy. Protectionism, as a general rule, doesn't work. In certain industries, especially heavily branded industries, it can work (the fact I believe that it can ever work puts me in the small, small minority of people who do economics), but commodities like iron and steel are not among them.

The Republicans have stripped the stimulus package of a bunch of bad provisions and a handful of good ones, as well. Here's hoping they get this one out.